SNC-Lavalin paid out millions in retention bonuses in midst of ethics scandal

MONTREAL — SNC-Lavalin Group Inc. was so worried about losing managers while it scrambled to deal with the fallout from an ethics scandal last year that it paid out millions in special retention bonuses to keep them coming to work.

But how real was that risk, really? Was the move a calculated effort to head off an employee stampede the company knew was coming? Or was it a panicked reaction to a low-probability event — a chance SNC nevertheless wasn’t willing to take given the thousands of projects its has underway worldwide at any given time?

Those are some of the questions being asked by compensation experts who have studied the engineering firm’s management proxy circular recently mailed to shareholders. The reality: As it dealt with an existential crisis last year that continues to drain the energy and resources of its senior officers, SNC dished out more than $15-million to a select group of employees for doing nothing more than not quitting.

“What you’re basically telling shareholders is ‘Regardless of what we say — i.e., that we’re going to pay for performance’ — that performance is thrown out the window when we think we may lose somebody,” said Luis Navas, an executive compensation specialist with Toronto-based Global Governance Advisors.

“You can’t say you support good governance and that you want highly linked pay-for-performance plans when frankly when performance is down, you’re saying ‘Yeah we can’t follow what we designed. We’ve got to throw it out the window and just give guarantees.’ You can’t have your cake and eat it, too.”

The proxy circular shows that SNC’s human resources committee approved special retention awards for employees below the executive vice-president level who were judged to be “high potential” or “key project” employees. Those participating in the company’s management incentive program received a minimum of two-thirds of their target bonuses for 2012 as well as a special cash bonus in December equal to half of their 2012 management incentive program target.

This special cash bonus alone cost the company $15.3-million. According to the filing, SNC gave 47 key employees restricted share unit grants at a value of 50% of their annual base salary and eight key employees a cash award equal to 50% of their annual base salary.

“These measures were considered successful as no key employees left the corporation since receiving [the compensation],” SNC said in the filing. As a result, the company was able to satisfy perhaps the most pressing concern among its customers: that it maintained the capability to complete work already underway.

SNC spokeswoman Leslie Quinton said Sunday it is considered “best practice and quite customary” among large companies in times of turmoil to offer short-term compensatory measures to retain staff.
“Particularly in companies like ours, which is dependent on our people (versus technology or assets) and which has been going through a vulnerable period, it is important to provide incentives to employees to provide some stability,” she said.

SNC characterizes the bonuses as a one-time cost that will not be repeated. But whether they were needed at all is debatable. After all, for Quebec-based engineers, the other employment options aren’t necessarily measurably better. Many of Quebec’s other high-profile engineering and construction firms face their own ethics problems as exposed in testimony to the provincially mandated Charbonneau corruption inquiry.

Last year was a “massive period of uncertainty” for SNC, said Michel Nadeau, executive director of the Montreal-based Institute for Governance of Private and Public Organizations. A whistleblower’s information led to an internal investigation that uncovered $56-million in improperly booked payments. The CEO at the time, Pierre Duhaime, was let go for breaching company policy and subsequently charged with fraud. Meanwhile, questions were swirling about just how far another former executive, construction chief Riadh Ben Aissa, went in courting the business of former Libyan dictator Muammar Gaddafi. Corruption allegations were in the newspapers nearly every week.

“To keep your best people, you’ve got to bring out the carrots,” Mr. Nadeau said. “It’s almost inevitable. I think it’s the cost of a crisis.”

Still, the $15-million disclosed is “a lot of money,” said Robert Levasseur, a principal of compensation consultants McDowall Associates in Toronto. “These kinds of retention arrangements for senior executives are definitely frowned upon.”

In this case, the bonuses are aimed at lower-level executives below vice-president level and that can be justified if there is a risk of project execution being threatened. That said, there’s a way to structure them in an intelligent way that goes beyond simply handing money out, Mr. Levasseur said.

“If you want a guy to stick around, you just don’t give him a big whack of money,” he said. “I usually recommend project completion bonuses … You back-end-load them.”

SNC’s proxy also shows its executive compensation advisors, Toronto-based Hugessen Consulting Inc., saw its fees increase fourfold in 2012 from the year before, to $311,600. After initially agreeing to pay Mr. Duhaime nearly $5-million in departure payments under Hugessen’s advice, SNC’s board subsequently decided to suspend the pay after he was arrested and hold it in escrow.